Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

5.3.2 Overview of Materials Management Techniques

Intended learning outcomes: Disclose the basic classification of detailed planning techniques in materials management. Explain the additional classification for unique demand or demand for high-cost items with a discontinuous demand pattern. Produce an overview on techniques such as Kanban, order point technique, CPFP (cumulative production figures principle), and MRP (material requirements planning).



Figures 5.3.2.1 and 5.3.2.2 distinguish among the common techniques of detailed planning techniques in materials management. First, Figure 5.3.2.1 classifies planning techniques according to the characteristic features frequency of customer demand and unit cost of items (as defined in Figure 4.4.2.1).

Fig. 5.3.2.1        Classification of detailed planning techniques in materials management.

Demand for low-cost items (with the exception of unique demand) or demand for high-cost items with a continuous or regular demand pattern is determined using stochastic techniques.
  • In general, forecasting techniques determine future demand analy­tically or intuitively. From this perspective, demand forecasting is a technique for determining stochastic independent demand and is thus part of stochastic materials management. Once demand has been forecasted, different stochastic planning techniques exist, all being relatively simple. They are described at a first glance below.
  • Dependent demand is calculated as if it were independent demand — that is, ignoring its possible derivation from independent demand.
  • For low-cost items, a very high service level has priority. This holds true especially in the event where the item appears on the bill of material with many components (see the case mentioned previously in Fig. 5.3.1.1). Low stock inventory is, due to the low carrying cost involved, of secondary importance.
  • For high-cost items, short lead times in the flow of goods, meaning rapid value-adding and administrative processes, take priority, requiring simple data and control flow. Inventory is possible: the continuous or regular demand pattern guarantees a future demand (for end products: a customer order)[note 516] within a short time. However, because of the high unit cost, the inventories should be low, which generally requires small batch sizes.

For all other kinds of demand, that is for unique demand or demand for high-cost items with a lumpy demand pattern, Figure 5.3.2.2 shows an additional classification of planning techniques, this time according to the accuracy of the demand and its relationship with other demand (see the definitions above).

Fig. 5.3.2.2        Additional classification of detailed planning techniques in materials management for unique demand or demand for high-cost items with a lumpy demand pattern.

1. Deterministic independent demand can be met according to the actual demand, that is, according to the customer order.
  • From this perspective, customer order processing and customer blanket order processing are techniques for determining deterministic independent demand and thus in a sense also belong to deterministic materials management.
2. Deterministic dependent demand can be calculated from higher-level independent demand
  • The algorithm called MRP uses “explodes” of the bill of material, that is, the product structure, into its components.
  • This type of demand calculation is a relatively complicated procedure. However, because of the priority of both high delivery reliability rate and low or even no inventory, it is appropriate.

Thus, while sometimes being rather complicated, planning techniques for items downstream from the order penetration point with unique demand or — for high-cost items — with a lumpy demand pattern present no great difficulty. However, planning of such items upstream from the OPP generally leads to unsatisfactory results:

3. Stochastic independent demand is determined more or less intuitively.
  • As demand is lumpy, forecasting techniques tend to be inaccurate, and therefore ask for a lot of additional intuition. The materials management “technique” is often a manual procedure performed by the scheduler using a very personal heuristic. It is often a risky technique that should be avoided whenever possible.
4. Stochastic dependent demand is derived by quasi-deterministic techniques.
  • Here, independent demand is determined using demand forecast techniques. Calculation of dependent demand is then based on independent demand by means of explosion of the bill of mate­rial. This is called quasi-deterministic explosion of the bill of material.
  • As this demand pattern requires forecasting, there is a risk of a low service level or high carrying cost due to capital costs or risk of deprecia­tion as a consequence of technical obsolescence or expiration due to perishability. As a consequence, any materials management technique handling this case will generally yield unsatis­fac­tory results. Therefore, it should be avoided whenever possible. How­ever, for many businesses, being in that situation is a fact of life.
  • It is interesting to consider that, because of the dependent nature of the demand, the value-adding processes are under the control of the company. A thorough analysis of these processes can lead to appropriate modifications that entail more items downstream from the OPP, or a more continuous demand pattern — both situations being desirable. See Chapter 5 on the just-in-time / lean concept.

Forecasting techniques will be discussed in Chapter 9. The planning techniques mentioned are explained in detail in different chapters. At a first glance, they are described in brief as follows.

  • Kanban is a simple technique for stochastic materials manage­ment, but it requires invested capital. Small buffer storages kept close to the user operation will contain a maximum number of standard containers or bins holding a fixed number of items. The Kanban card is a means to identify the contents of the container and to release the order. The order batch size will be one or more empty containers, which are either sent directly by work center employees to the supplier or collected by one of the supplier’s employees. The supplier executes the implied stock replenishment order and delivers it directly to the buffer. The Kanban feedback loop is then closed. One of the tasks of long- and medium-term planning is to determine the type and number of Kanban cards for each feedback loop. See Section 6.3.
  • The cumulative production figures principle (CPFP) is another simple technique. In the manufacturing process of a certain product, the technique in essence counts the number of intermediate products at particular count points. It compares this amount to the planned flow of goods, through putting the two cumulative production figure curves, or whole cumulative production figure diagrams — the projected diagram and the actual diagram — one on top of the other. The object is to bring the actual diagram closer to the projected diagram, which can be accomplished by speeding up or slowing down the manufacturing process. See Section 6.4.
  • The (stochastic) order point technique compares goods on hand — plus open orders and, sometimes, minus allocated quantities (reservations) — with a certain level called the order point. If the quantity calculated in this manner is no greater than the order point, the system generates orders to replenish stock. These replenishment orders can then be released. The order point is normally calculated as average usage (a forecast!) during the replenishment lead time plus safety stock, or reserved stock, to compensate for forecast errors. The “optimum” order quantity or batch size, called the economic order quantity (EOQ), can be determined through comparing ordering and setup costs to carrying cost. See here Chapter 11.
  • The (deterministic) MRP-technique (material requirements planning)[note 516] calculates, starting from higher-level independent demand, dependent demand by exploding the bill of material. The individual dependent demands are grouped together according to certain batch sizing policies and planned for timely production or procurement. In the deterministic case, the safety stock of components can be very small; inventory is kept to a minimum. In the quasi-deterministic case, safety demand at the level of the independent demand determines the safety stock of components. Deterministic materials management produces order proposals and the information required to control the processing of those orders. See here Chapter 12.

Section 6.5.2 discusses further a possible strategy for choosing one of these techniques and gives tips for implementing procedures.


The following animation distinguishes among the common techniques of materials management (shown in parentheses) according to the accuracy and the relationship of demand, the frequency of the consumer demand, and production or procurement costs as well.
Drag the fields into the prepared scheme in the correct way




Course section 5.3: Subsections and their intended learning outcomes

  • 5.3 Introduction to Detailed Planning and Execution

    Intended learning outcomes: Disclose basic principles of materials management, scheduling and capacity management concepts. Produce an overview of materials management, scheduling and capacity management techniques. Differentiate between available-to-promise and capable-to-promise.

  • 5.3.1 Basic Principles of Materials Management Concepts

    Intended learning outcomes: Present the objectives of materials management. Differentiate between deterministic materials management and stochastic materials management. Differentiate between independent demand and dependent demand. Produce an overview on quasi-deterministic materials management, fill rate, cumulative fill rate, stockout, backorder.

  • 5.3.2 Overview of Materials Management Techniques

    Intended learning outcomes: Disclose the basic classification of detailed planning techniques in materials management. Explain the additional classification for unique demand or demand for high-cost items with a discontinuous demand pattern. Produce an overview on techniques such as Kanban, order point technique, CPFP (cumulative production figures principle), and MRP (material requirements planning).

  • 5.3.3 Basic Principles of Scheduling and Capacity Management Concepts

    Intended learning outcomes: Present the objectives of the tasks as well as the overall objective of scheduling and capacity management. Describe the vicious circle caused when capacity bottlenecks prolong the planned production lead-time. Disclose to which extent capacity can be stored.

  • 5.3.4 Overview of Scheduling and Capacity Management Techniques

    Intended learning outcomes: Differentiate between infinite loading and finite loading. Explain the classification of techniques for capacity management in dependency upon flexibility of capacity and flexibility of order due date. Produce an overview on order-oriented infinite loading, order-wise infinite and finite loading, operations-oriented and order-oriented finite loading, constraint-oriented finite loading, load-oriented order release (Loor), capacity-oriented materials management (Corma).

  • 5.3.5 Available-to-Promise (ATP) and Capable-to-Promise (CTP)

    Intended learning outcomes: Explain available-to-promise (ATP) and the determination of ATP quantities. Produce an overview on the techniques of multilevel available-to-promise (MLATP) and capable-to-promise (CTP).